Social Security: Could Cuts to the 401(k) Tax Exemption Fund Program Be Enough?  Here is the Proposal

Social Security: Could Cuts to the 401(k) Tax Exemption Fund Program Be Enough? Here is the Proposal


One of the biggest concerns about Social Security involves a trust fund that is expected to run out of money in about a decade, leaving the program to pay only 77% of current benefits. A new paper from the Center for Retirement Research at Boston College proposes to fix that problem by eliminating the tax preferences attached to 401(k)s and other employer-sponsored retirement plans.

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The paper, released last month, cites U.S. Treasury Department estimates showing that tax preferences for employer-sponsored retirement plans and IRAs reduce federal income taxes, and thus the income, about $185 billion to $189 billion in 2020. However, evidence suggests that federal tax preferences will do little to increase retirement savings, according to a Jan. 16 brief from co-authors that Andrew Biggs and Alicia Munnell.

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Their idea? Reject the retirement savings tax preferences of these plans and use the following income to address a large part of Social Security’s long-term funding gap.

“Finally, reducing tax expenditures for retirement plans can be an effective way to help address other pressing demands on the federal budget, such as the funding shortfall of Social Security, ” letter to the authors.

The shortfall they cite refers to Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund, which is expected to become insolvent around 2033 or 2034. If that happens, Social Security will rely solely on payroll taxes to fund benefits. , which will reduce existing funding. for almost a quarter.

Many ideas have been proposed on how to deal with disability. Most focus on some combination of increasing the Social Security payroll tax, cutting benefits and raising the full retirement age.

Biggs and Munnell’s proposal breaks new ground by looking to employer-sponsored retirement plans to bolster Social Security finances.

“Current tax preferences primarily benefit high earners, and tax expenditures fail to meet the broader policy goals of increasing national savings or expanding plan coverage,” the authors wrote. . “Therefore, the case is strong for preventing these tax violations.”

Not everyone agrees. As noted on the 401(k) Specialist website in a blog last week, Biggs and Munnell’s proposal is already gaining momentum on a couple of fronts.

One of the critics is Adam Michel, director of tax policy studies at the Cato Institute. In a brief filed Feb. 1, Michel took issue with Biggs and Munnell’s claim that tax-advantaged retirement plans do little to increase retirement savings.

“The overwhelming evidence is that tax-advantaged accounts increase private savings,” writes Michel. “Over time, even a small increase in private savings can contribute to a larger capital stock, increased labor supply and a larger economy. The private benefits of increased savings, coupled with broader economic benefits, far outweighing any temporary government losses, even if lower incomes do not induce an increase in private savings.

A separate paper from current and former officials at George Mason University’s Mercantus Center criticized the Biggs-Munnell proposal because of its tax implications and potential impact on Social Security.

“Instead of ending an unfair tax preference, the Biggs-Munnell proposal would raise taxes substantially by effectively double-taxing retirement savings,” the authors of the Mercantus Center wrote. “Furthermore, bailing out Social Security with this massive infusion of general revenues has many negative consequences for the Social Security program as a whole as well as its individual participants.”

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This article originally appeared on GOBankingRates.com: Social Security: Could Cutting the 401(k) Tax Exemption Fund Program Be Enough? Here is the Proposal

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